Vecima Networks Q3 2024 Earnings Call Transcript

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Provided by Quartr
May 15, 2024

There are 6 speakers on the call.

Operator

This is the Chorus Call conference operator. Welcome to the Bessemer Networks Third Quarter Fiscal 20 24 Earnings Conference Call and Webcast. As a reminder, all participants are in a listen only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions.

Operator

Presenting today on behalf of Bessemer Networks are Sumit Kumar, President and CEO and Dale Booth, Chief Financial Officer. Today's call will begin with executive commentary on Bessemer's financial and operational performance for the Q3 fiscal 2024 results. Lastly, the call will finish with a question and answer period for analysts and institutional investors. The press release announcing the company's Q3 fiscal 2024 results as well as detailed supplemental investor information are posted on Bessema's website at www.bessema dotcom under the Investor Relations heading. The highlights provided in this call should be understood in conjunction with the company's unaudited interim condensed consolidated financial statements and accompanying notes for the 3 9 months ended March 31, 2024.

Operator

Certain statements in this conference call and webcast may constitute forward looking statements within the meaning of applicable securities laws from which Bessemer's actual results could differ. Consequently, attendees should not place undue reliance on such forward looking statements. All statements other than statements of historical fact are forward looking statements. These statements include, but are not limited to statements regarding management's intentions, beliefs or current expectations with respect to market and general economic conditions, future sales and revenue expectations, future costs and operating performance. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict and or are beyond our control.

Operator

Bessemer disclaims any intention or obligation to update or revise any forward looking statements as a result of new information, future events or otherwise, except as required by law. Please review the cautionary language in the company's 3rd quarter earnings report and press release as well as its 2023 annual report regarding the various factors, assumptions and risks that could cause actual results to differ. These documents are available on Bessema's website at www dotdecimal.com under the Investor Relations heading and on SEDAR at www.sedarplus. Ca. At this time, I would like to turn the conference over to Mr.

Operator

Kumar to proceed with his remarks. Please go ahead, sir.

Speaker 1

Thank you. Good morning and welcome everyone. Thank you for joining us. The Q3 brought the start of a major growth wave we've been anticipating and with it record financial performance, including a new high watermark for quarterly revenue and adjusted EBITDA. I'm going to begin today with an overview of our Q3 highlights and achievements, Dale will follow with more details on our financial performance, and then I'll return to talk about our outlook going forward.

Speaker 1

Starting with consolidated results, I'm thrilled to report that we beat our all time quarterly revenue record with sales of $80,100,000 in the 3rd quarter. That represents almost 29.5% sequential growth from Q2. We paired this with strong gross margin percentage of 46.9 percent, which in turn helped us achieve the record adjusted EBITDA of $17,200,000 and adjusted EBITDA margin of 21.5%. Earnings performance was also very robust with adjusted earnings per share increasing to $0.31 That's up 72% from a year ago and more than double what we achieved last quarter in Q2. In particular, the 3rd quarter was another breakout and record quarter for our Video and Broadband Solutions segment with sales $68,200,000 climbing 39 percent quarter over quarter from Q2.

Speaker 1

This growth was of course driven by our Enter DAA products as the planned ramp in the second half related to major DAA rollouts got underway, just as we expected, following the brief transition period in the first half. This included a sharp ramp in ERM3 Remote PHY deliveries to Charter as part of their hybrid fiber coax upgrade initiative. As we mentioned previously, Charter intends to use our solution for a substantial portion of their footprint wide cable access network upgrade to DAA. And as such, it represents a major multiyear revenue opportunity for Bessemer, and that's only just beginning. Demand was also very strong for our inter optical 10 gig PON products in Q3 as customers continue to broaden fiber to the home deployments as part of funded rural broadband programs.

Speaker 1

So while significantly ramping product deliveries into customer rollout programs, we were also making major strides with new products during the quarter. Looking first at our EN9000 GAAP node, I'm pleased to report that we achieved certification for this new entra platform with a leading Tier 1 customer in Q3. The EN9000 is a powerful and future proof solution that enables customers to easily transition to 10 gs and DOCSIS 4.0 technologies while protecting current network investments that they're making. We also completed lab trials and initiated field trials for our ENTRE EXS-sixteen ten all pawn shelf. That's another innovative Entra solution that provides maximum flexibility for customers by enabling them to cost effectively deploy fiber to the premises in any market or hub deployment configuration.

Speaker 1

Additionally, we unveiled our new Entra virtualized cable modem termination system platform during the quarter. So this is a natural next step marking VSSL has moved into the fast growing VCMTS market and it further adds to our already expansive Entra DAA offering for customers. As part of the Entra cloud platform, our VCMTS solution leverages software that's underpinned by the common engine of our leading DAA intellectual property. Today, within our remote MacPhi platform, that software already powers several multi gig DAA deployments at our customers. We've now initiated VTMTS lab trials with a leading Tier 1 operator and we expect field trials to commence in the Q4 of calendar 2024.

Speaker 1

Also on the enter front, early in the Q3, we entered a U. S. Manufacturing agreement for some of our fiber access products to ensure they meet Buy America requirements related to the U. S. Bead program for fiber.

Speaker 1

The Bead program is this major $42,500,000,000 U. S. Initiative, designed to bring high speed broadband to underserved or un served areas of the United States. We see vast opportunities for our fiber access products flowing from it. And this agreement helps ensure we can capitalize on them.

Speaker 1

Combined, these new products and programs are adding fuel to the already powerful Enter DAA growth engine that we have. We now have multiple pathways of growth converging just as the industry demand for DAA is starting to accelerate. At the same time, the customer base for our Enter DAA solutions is continuing to expand. By the end of the Q3, engagements for Enter Cable and Fiber Access are now approaching 200 unique program opportunities across 113 operators globally with 58 customers ordering product today. That's up from 106 customer engagements and 50 ordering product a year ago, adding to the wave of demand that's now building for our Entra Technologies and Solutions.

Speaker 1

So a phenomenal quarter for our VBS segment and Entra with much more yet to come. Turning now to our Content Delivery and Storage segment. Sales of $10,200,000 were lower year over year and quarter over quarter. Lumpy quarters are normal for this segment as we've indicated before, mostly reflecting the timing of customer project rollouts and stepwise capacity expansions. CDS service revenues were very strong, growing 10% year over year and contributing to strong Q3 gross margin results for the segment.

Speaker 1

Our solid service revenue performance reflects a steadily growing deployed base of media scale IPTV networks in the market, And we continue to grow that base in Q3 as we undertook further IPTV expansions with multiple customers. Turning to telematics. That segment also turned in record quarter with revenues of $1,700,000 up 3% year over year. We added another 10 new customers for our narrow asset tracking platform during the quarter, which in turn increased the number of movable assets we now monitor over to over 64,000 units. We also received an order for approximately 300 additional telematics subscriptions from an existing municipal government customer.

Speaker 1

Telematics also continues to be a highly profitable part of the business with the segment achieving strong gross margin of 67.8% 67.8% in the quarter. Overall, it was a simply excellent quarter for Bessemer. And all across our operations, we continue to execute very successfully on our growth strategy. At this point, I'll turn the call over to Dale to provide more color on our Q3 results.

Speaker 2

Dale? Thank you, Sumit, and thank you all for joining us today. For the purposes of this call, we assume that everyone has seen our 3rd quarter fiscal 2024 news release, MD and A and financial statements posted on Bessemer's website. Starting with consolidated sales, we generated 3rd quarter revenue of $80,100,000 which was up 2% year over year and 29% quarter over quarter. The Video and Broadband Solutions segment accounted for $68,200,000 of these sales.

Speaker 2

That was an increase of 5% year over year and 39% quarter over quarter and reflects the Entra DAA sales momentum Sumit discussed. DAA sales as a whole accounted for $60,900,000 of VBS sales. While not quite a match for the all time high results of a year ago, they were 39% higher on a sequential quarterly basis. PBS segment sales also benefited from a strong contribution from our commercial video products as our lead customer increased orders for legacy TC600E products. This helped boost commercial video sales to $7,200,000 up 2 44% from a year ago and 37% from Q2 of this year.

Speaker 2

While we're pleased with our strong Q3 commercial video results, overall, we view them as temporary. This part of our business continues to transition to next generation platforms, and increasingly, our newer DAA driven commercial video solutions are being accounted for as part of Entra Family sales. Our Content Delivery and Storage segment saw continued quarterly revenue fluctuations with sales of $10,200,000 decreasing 13% year over year and 9% quarter over quarter. This mostly reflects timing of orders, and as Sumit noted, quarterly sales variances are typical for this segment. Turning to telematics.

Speaker 2

This segment turned in another good quarter with sales of $1,700,000 increasing 3% year over year and 4% quarter over quarter. Gross margin for Bessemer as a whole increased to 46 0.9%, up 3.40 basis points from 43.5% in the same period last year. This reflects improved margin performance from all three of our business segments, much of it related to an improved supply chain environment and lower expediting costs. It also reflects a very strong gross margin performance of 59.8% from our CDS segment, reflecting the increase in higher margin services revenues year over year. Turning to Q3 operating expenses, the notable changes year over year were as follows.

Speaker 2

R and D expenses decreased by $800,000 to $11,300,000 This primarily reflects a targeted decrease in salary and wage costs and higher capitalized development costs, partially offset by increased costs for software and licensing. Sales and marketing expenses for the Q3 were $200,000 lower at $6,700,000 mostly due to reduced trade show and promotion costs. 3rd quarter G and expenses decreased by $500,000 to $7,900,000 This reflects lower ERP program implementation costs year over year as well as lower staffing costs. Other expense increased by $1,000,000 to $1,300,000 reflecting a one time $1,300,000 advisory fee related to M and A activity in the Q3. In total, our 3rd quarter OpEx was $27,500,000 a decrease of $400,000 year over year, but $2,600,000 higher quarter over quarter.

Speaker 2

As we mentioned in our last call, operating expenses in the second half of this year were expected to be higher than in the first half as we support the ramp up of our sales. In the Video and Broadband Solutions segments, 3rd quarter operating expenses were down $400,000 year over year, reflecting a combination of lower G and A and sales and marketing expense, partially offset by the one time advisory fees related to M and A activity in the Q3. Content delivery and storage operating expenses were generally flat year over year at $7,400,000 And in our Telematics segment, operating expenses of $900,000 were in line with prior year results. I note that reported R and D expense in a period is typically different than the actual expenditure. That's because certain R and D expenditures are deferred until product commercialization.

Speaker 2

Adjusting for deferrals, amortization of deferred development costs and income tax credits, actual R and D investment decreased to $14,600,000 or 18 percent of sales in the 3rd quarter from $15,400,000 or 20 percent of sales in Q3 last year. Looking at our bottom line results, 3rd quarter operating income was up 64% year over year to $10,100,000 This primarily reflects the higher VBS sales and an overall stronger gross margin percentage year over year. We generated record 3rd quarter adjusted EBITDA of $17,200,000 a year over year increase of $5,500,000 or 47%. This primarily reflects our higher gross margins as well as lower operating expenses. On a quarter over quarter basis, adjusted EBITDA increased by $4,700,000 or 38%.

Speaker 2

We recorded a foreign exchange loss of $1,200,000 in the 3rd quarter, which compares to a foreign exchange gain of $200,000 in the same period last year. This reflects a weakening Canadian dollar negatively impacting the translation of our monetary liabilities. Net income from continuing operations for the quarter increased to $5,800,000 or $0.24 per share as compared to $4,500,000 or $0.18 per share for the same period of fiscal 2023. Turning to the balance sheet. We ended the 3rd quarter with $3,300,000 in cash, up from $2,300,000 in the same period last year.

Speaker 2

Working capital of $82,100,000 decreased slightly from $83,700,000 in Q4 fiscal 2023 and up slightly from $80,400,000 at the end of Q2 fiscal 2024. We note that working capital balances can be subject to significant swings from quarter to quarter. Our product shipments are lumpy, reflecting the requirement of our major customers. Other timing issues like contracts with greater than 30 day payment terms also affect working capital, particularly if shipments are back end weighted for a quarter. Lastly, cash flow used in operations for the Q3 was $28,600,000 as compared to cash provided by operations of $3,800,000 during the same period last year.

Speaker 2

The $32,400,000 increase in cash flow used in operations reflects a $35,600,000 decrease in cash flow from non cash working capital, partially offset by a $3,100,000 increase in operating cash flow. On a final note, the Board of Directors approved a quarterly dividend of $0.055 per common share payable on June 17, 2024, to shareholders of record as at May 24, 2024. It is important to note that this dividend will be designated as an eligible dividend for Canadian income tax purposes. So just to summarize, an excellent quarter with robust sales growth and tight control of operating expenses translating to a very strong profitability. Now back to Sumit.

Speaker 1

Thank you, Dale. While our Q3 results were deeply satisfying, we believe they represent just the beginning of the momentum we see ahead for Bessemer. As I mentioned earlier, a number of growth drivers are converging just as operators worldwide are launching major multiyear upgrades to their networks. In our BBS segment, we expect to see a further ramp up of our quarterly run rate in Q4 as we continue to support our customers' rollout plans with our growing portfolio of Entra DAA cable and fiber access products. We anticipate another record quarter for Entra sales in Q4 with momentum expected to build still further through fiscal 2025 and beyond.

Speaker 1

In the CDS segment, overall demand for our IPTV and open captioning solutions remain strong. However, shifts in project timing continue to affect our expectations for the full year in fiscal 2024. We now expect the CDS segment to achieve fiscal 2024 sales results similar to or slightly lower than the strong performance we achieved in fiscal 2023. Longer term, we continue to see the robust future growth potential as the IPTV and OTT streaming services markets continue to expand and the open caching and dynamic advertising growth engines mature. Finally, in our telematics business, we expect consistent incremental growth from the fleet tracking market and continued increases in demand for our newer movable asset tracking services.

Speaker 1

The latter has become an important driver of segment differentiation and gains in recent quarters. Overall, we're expecting a strong finish to the year as we build on Q3's record results and establish another compelling run rate in the Q4. All told, for fiscal 'twenty four, after factoring in the first half transition, along with the timing shift in our CDS expectations, we expect full year consolidated revenues to be modestly lower than the all time record results we achieved in fiscal 2023. But after producing nearly 30% growth in Q3 with more to come in Q4, our run rate is expected to put us on a path for substantial annual growth going forward. We expect significant year over year top line gains building again for fiscal 2025.

Speaker 1

We also continue to target a gross margin percentage in the 45% to 49% range, which combined with our OpEx model is expected to support excellent full year adjusted EBITDA performance both this year and next. In summary, this is a tremendously exciting time for Bessemer, with compelling prospects both in the near and the longer term. Our market position is incredibly strong. We continue to expand our product portfolio with innovative new solutions and our relationship with customers is growing and strengthening as we support their increasingly wide scale rollouts. The next major growth wave of growth is upon us.

Speaker 1

Envestma is executing very effectively all across the business as we capture the multiple multiyear opportunities in our markets. That concludes our formal comments for today. We'd now be happy to take questions. Operator?

Operator

Thank you. We will now begin the question and answer session for analysts and institutional investors. The first question comes from Jim Byrne of Acumen Capital. Please go ahead.

Speaker 3

Yes, good morning guys. Good morning. Sumit, maybe you could just expand on the recent distribution deals that you announced, I think in Denmark and Germany, just give us an idea of how meaningful those types of deals could be?

Speaker 1

Thanks, Jim. I think as we've seen and we've had several of those successes distributor agreement announcements and for the reseller channel, we've always felt that there's a strong relationship that can flow when you have a world leading technology vendor like us in the key CapEx spend areas of operators globally. And that ties to an opportunity for strong best of breed channel partners in the regions to be an army on the ground for us and to really leverage the technology we bring to bear to generate results for operators locally in those regions. We've been signing on these partners. It's part of our broader strategy to really reach every single broadband service provider in the world with this portfolio and intra we've built.

Speaker 1

And internationally, these Tier 2 and 3 customers do typically work through these resellers, distributors or system integrators that help them locally on the ground there. So again, we're working with some of the best partners in every region and you're seeing that reflected in these announcements with respect to new agreements that we're bringing up with channel partners.

Speaker 3

Just maybe order of magnitude, what does that channel partner revenue stream look like today? And how

Speaker 4

big of

Speaker 3

a contribution could that make in the next few years?

Speaker 1

I think it's meaningful today. We're seeing as consistent with operators being very in the very early innings of DAA rollouts generally. We're just getting started in some respects with a number of the channel partners, but the early wins that they're bringing to the table have been meaningful to us already. So I'm not going to really dial in on where we're at today in terms of contribution from the reseller channel. But we have great opportunity and overall addressable market that's coming to bear through those types of partners globally and we expect it to be meaningful to our entire results in fiscal 'twenty five.

Speaker 3

Okay, perfect. And then maybe just last one for me. Just give us a reminder of where the DAA rollout is in Europe kind of relative to North America?

Speaker 1

Yes. As before, in EMEA, they have a different over builders or whatnot. And there's different dynamics than the U. S. Market that's typically moving earlier in the cycle to a network infrastructure evolution or transformation that we're creating with DAA.

Speaker 1

So we have seen that cadence in EMEA, but now turn by turn, we're getting further deployment activity going in that region. So like anywhere else in the world, the need for 10 achieving multi gigabit speeds over all types of access networks is common around the world. But they have different competitive factors there and then that changes the timing perhaps potentially a little bit from behind the U. S. And CALA is another region.

Speaker 1

So I think, as I said before, with respect to the question on the channel partners, we do start to see that moving towards meaningful contributions to our overall entra.

Operator

The next question comes from Jesse Pytlak of Cormark. Please go ahead.

Speaker 4

Hey, good afternoon. Just on the bid for Cassie's assets, can you just update us to where the process currently stands? And just any of your expectations around interest from other companies in these assets?

Speaker 1

Yes, Jeff. Thanks. I think I'm not really willing or able to provide more information on the open call today. I'll just add that, of course, we have a strong investment thesis. We firmly believe in Bessema being in a completely unique position in the marketplace between our software and our IP and our strength in the portfolio and our customer set with the virtualized cable access.

Speaker 1

We invented that. So that's essential. A kind of party like VESMA, I think is essential to delivering a solid outcome to the industry from these assets. So we have, of course, a very well proven track record of doing that with our acquisitions and making them very strong for the industry, particularly when they're very complementary to what we're doing in DA and 10 gs. So as always, whether we accelerate with M and A or we leverage on the organic talent we have to bring these leading solutions to the market, we do expect to be a major player in the overall market, including the VCMTS.

Speaker 1

So we'll be happy to provide updates as that discussion matures.

Speaker 4

I understand. Maybe just thinking a bit more broadly then, given what's happened with CASA and maybe just kind of considering the financial condition of some of the competitors both in and outside of the cable plant. Can you maybe just speak to what you're seeing on the competitive landscape and maybe how it could be influencing some of your conversations with your customers?

Speaker 1

Yes. I'd rather not go into too much detail again, Jesse. I think that I think everyone's well aware of the participants in the market and how the market share works, particularly in the VCMTS. We do think that there is a need in the virtual solution. We will address that with our organic platform.

Speaker 1

But these assets represent another opportunity to also do so. And we'll see that again, I believe that we are uniquely capable of making the assets perform for the industry and deliver a solid solution. But we'll again provide updates as that discussion culminates.

Speaker 4

Okay. And then maybe just on the balance sheet, leverage has been coming up. You temporarily increased your credit line. You do have that bid out there for the Casa assets. Can you just run through your thinking around how you're going to how you plan to manage the balance sheet and maybe what kind of debt level you're comfortable with carrying?

Speaker 1

Yes. I think you've seen we've hit the $17,200,000 on the EBITDA on the run rate. So that gives you a sense on what type of leverage ratios should be available to these companies like Bessemer. We are very confident in having multiple sources of available liquidity and funding, inclusive of any consummation of M and A. Again, as you might expect for a company of our size, scale, performance, the EBITDA run rate we have, We do feel like we have numerous paths to capital available to us, and we'll bring those to bear as necessary.

Operator

The next question comes from Ryan Coons of Needham and Company. Please go ahead.

Speaker 5

Thanks for the question. I wonder, assuming if you could maybe give us some color on the mix of DAA nodes versus fiber that you're seeing in terms of demand here in the first half of the calendar year relative to your recent results and your expectations for 2Q?

Speaker 1

Yes. I think we are seeing, of course, with some of the new program wins that have been accelerating as we enter calendar 'twenty four, of course, the cable access is becoming a growth driver most recently for Entre. But we do have ongoing broad deployment on the rural broadband programs with fiber And we know that BEAT is still in the future overall for that set of products. We have world leading market share in 10 gig remote LTs on the fiber access front. So in recent quarters, the mix is probably slightly more cable access heavy in our intra portfolio, of course, with these new major Tier 1 programs running.

Speaker 1

But fiber is continuing. And on the field front, the RDOF deployment of fiber is accelerating through calendar 2024. So as we continue to see operators kind of work through their inventory and ramp up their field deployments of fiber in the home, we're expecting some really good tailwinds on the fiber access front through Timur's through calendar 2024 as well. And then when the comes into the picture, that creates a tremendous headwind for or tailwind for fiber access for us in parallel to these tailwinds we've got going in the cable access

Speaker 5

side. Right. That's really helpful. And you mentioned your large carrier program ramping. How would you maybe qualify your visibility there on that big program?

Speaker 5

Do you feel like you've got a firmer kind of grasp of what kind of the rest of the calendar year looks like at least for the company in terms of expectations to ship?

Speaker 1

We do have good visibility, as you could expect, with a major Tier 1 operator, major program that's underway. There's a lot of crisp focus on the planning cycle over the next 3 years that they have to conduct for this infrastructure upgrade they're going to do across their HFC network. So along with that, it's important to them and important to us that we have good visibility into the profile. Of course, as always with major Tier 1s, major network upgrades, quarter to quarter fluctuation is totally normal. They've got to get the labor going and all that.

Speaker 1

But in the bigger picture sense, when we look calendar year to calendar year, the visibility is solid and strong and consistent with everything we've seen and that allows us to execute like we planned.

Speaker 4

Okay. That's great. And one last, if

Speaker 5

I could. On congrats on the gap node kind of moving to the next key milestone here. What's your updated view on when you see the gap product lines really start to achieve kind of critical mass in terms of substituting for traditional nodes?

Speaker 1

Yes, I think we've talked about before that what GAAP allows operators to do is go modular and future proof, whereas they have these multi dozens of legacy nodes from all the incremental upgrades over the years or M and A and consolidation of other operators has led them to a place where

Speaker 4

they've got too much

Speaker 1

fragmentation in legacy nodes. And then we need to go to 1.8 gigahertz capability. We're adding incremental power rails, the thermal capacity So So this vision of the long term multi decade living node is coming to fruition within GAAP. And we expect that, like we said, we have a Tier 1 go through certification of it very recently. So we're expecting us to look at contribution coming in this calendar year in a meaningful way.

Speaker 4

Ryan.

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Key Takeaways

  • Company delivered a record Q3 with $80.1 million in revenue (up 29.5% sequentially) and a new high‐watermark adjusted EBITDA of $17.2 million (21.5% margin).
  • Video & Broadband Solutions sales surged to $68.2 million (+39% QoQ), driven by Entra DAA rollouts—especially Charter ERM3 Remote PHY—and strong demand for 10 G PON fiber products.
  • Key product milestones included EN9000 certification with a Tier 1 customer, field trials of the Entra EXS-16 fiber shelf, initiation of virtualized CMTS trials, and a U.S. manufacturing agreement for BEAD-compliant fiber access.
  • Content Delivery & Storage saw lumpiness in hardware sales but 10% growth in higher‐margin services, while Telematics posted a record quarter ($1.7 million, +3% YoY) and now tracks over 64,000 assets.
  • Management expects another blowout Q4 as Entra deployments ramp, modestly lower FY 2024 revenue vs. FY 2023 due to segment timing shifts, and strong growth ahead in fiscal 2025 with a 45–49% gross‐margin target.
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Earnings Conference Call
Vecima Networks Q3 2024
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